Suggestions for mastering speculation

This is a discussion on Suggestions for mastering speculation within the General Trading Chat forums, part of the Reception category; Originally Posted by firewalker99
Having tight stops has nothing do with scalping, but everything with understanding the market's behaviour and ...

Having tight stops has nothing do with scalping, but everything with understanding the market's behaviour and having the patience to wait until the probabilities are highest. I don't know anything about new_trader's strategy, other that he uses a 1.25 ES apparently, but that says nothing about the target.

Using a 2 point stop on the ES yesterday, had no effect on my exit (which was +30 points, but only 7 minutes later). I consider myself only a mediocre trader. For example, I've seen many of the more experienced traders use 0.50 ES stops with 50 point targets. Yes, also in the last week or month.

I have argued many times with you said in the past, but I'm not afraid to admit that the above is absolutely correct. That doesn't change the fact that it'll probably fall on deaf ear's because it's always easier to shoot the messenger, than attack the message.

I fear your point will get lost here. Those who are waiting for a bar to close on their 5 or 15 minute chart, should not complain that they can't place their stops close enough. A chart may show discrete bars or candles but price flows continuously.

Exactly. But most people rather spent time reading complex mathematical theoretic models about risk & money management, Sharpe ratio, R:R, etc, etc. than study the market until their eyes bleed.

If you're in a trade for one hour and the market hasn't moved much, shouldn't you ask yourself whether or not the market has given a clear signal? You should always aim to enter a trade when there is a very high chance that price will move in the favourable direction sooner rather than later.

If you're caught in whipsaw, then it means you're timing is off. The only thing that is affected by the current volatility, is the margin requirements your broker demands.

Minimizing risk should be the number 1 priority on anyone's list. Unfortunately, most people only think about the reward, which - unlike risk - is something you don't have complete control over. Is it necessary to have 1 point stops in order to make a profit? Obviously not. But then should it come as a surprise why many people are losing money in this volatility?

Luck (like talent) is overrated...

Well I'm surprised to hear this coming from you... I thought your trading approach had high win%, but anyhow... There are only two explanations for what you are describing: you're either using too wide stops (most likely) or you're cutting your profits short.

ATR is fine as far as it goes. And I'm not ashamed to admit I used it for a long time though, before realizing there is no reason to have 10 point stops just because the market can move 10 points in your chosen timeframe!

Despite that almost nobody will agree, new_trader is right, stops are a function of proficiency, and nothing else. Try a tick chart.

Firewalker, you are talking about a very specific type of day trading where a high hit rate and low risk is important. If I trade purely off the orderbook and don't use any charts, I am more inclined to trade this way. However, that is not my point. My point is that there are many ways to trade and, consequently, a high winner rate and low risk rate is not the only way, neither is it the best or the worst way. The fact that a trader says that risk is more important than reward just represents their own trading personality. Another trader will tell you the opposite and, another still, will tell you they are both equally important. It doesn't matter and nobody is right here. The be all and end all is not entries and timing perfection for everybody and, for that reason, it is incorrect to tell them that their method is wrong and they should be focusing on this or that - their method is only wrong if they consistently lose money.

An example I keep trying to give is, what if you weren't an intraday trader, what if you were trading over a period of weeks rather than minutes? Could you still get the same level of precision? I don't think so. Why is that? The obvious answer is because the market moves in a much wider range in the period of a day or week than it does in a minute or 60 minutes - i.e. it is more volatile in the longer time frame. Therefore, to say that a trader shouldn't use volatility is pure folly because it depends on the time frame and the way they trade.

Quote:

Originally Posted by firewalker99

Minimizing risk should be the number 1 priority on anyone's list. Unfortunately, most people only think about the reward, which - unlike risk - is something you don't have complete control over. Is it necessary to have 1 point stops in order to make a profit? Obviously not. But then should it come as a surprise why many people are losing money in this volatility?

Yes, but you are referring to just tight stops in this case and risk isn't just having a tight stop. It is about sizing correctly, not risking too much per trade as well as stops. If you are a big trader or trading an illiquid market, liquidy management also plays an imporant role.

I also think less people worry about trade exits more than entries and stop levels - read across the various trading message boards in the World and it seems that most are trying to get 90-100% hit rates. They pay no attention to trade exits which are the hardest to master of all.

Quote:

Originally Posted by firewalker99

If you're caught in whipsaw, then it means you're timing is off.

Agreed, sometimes it is, but other times it's because 'anything can happen' - as I have said before, there is an element of chance in every trade. As you mentioned earlier, entries are made when the chances of the trade in the favourable direction are the highest - there is nothing more than a favourable possibility. Losing money over a period of time on a number of trades is the fault of the trader, but losing money on a single trade can be down to chance not giving you a winning trade this time round (not always, sometimes a trader makes mistakes, but the other times it's down to chance).

Quote:

Originally Posted by firewalker99

Despite that almost nobody will agree, new_trader is right, stops are a function of proficiency, and nothing else. Try a tick chart.

I would never deny that proficiency is imporant, but stops are not just based on this - unless proficiency encompasses everything that has been said in this topic (ability to measure time frame, liquidity, volatility, etc correctly).

Last edited by Jaydee; Oct 11, 2008 at 4:16pm.
Reason: Added a few things

[QUOTE=Jaydee;532124]... what if you weren't an intraday trader, what if you were trading over a period of weeks rather than minutes? Could you still get the same level of precision? I don't think so....

Jay, this is why intraday is so popular with individuals, you know where you stand, it's black and white, and easier to work the %s, most of the time.

Jay, this is why intraday is so popular with individuals, you know where you stand, it's black and white, and easier to work the %s, most of the time.

I'd agree with that mate. I just thought it was a bit misleading to say volatility is nonsense and stops have to be tight and entries perfect when the style to which new trader and Firewalker refer is so specific which is why I was trying to provide another angle.

I'd agree with that mate. I just thought it was a bit misleading to say volatility is nonsense and stops have to be tight and entries perfect when the style to which new trader and Firewalker refer is so specific which is why I was trying to provide another angle.

Understand what you are saying Jay, but volatility basically opens up range width, which offers more potential for profit. This has to be put into the context of 'solid' price 'discovery', not just a blip on the radar, the price has got to have real market attention.

Understand what you are saying Jay, but volatility basically opens up range width, which offers more potential for profit. This has to be put into the context of 'solid' price 'discovery', not just a blip on the radar, the price has got to have real market attention.

Yes, I agree the price must be focused on, but when you start looking at wider ranges and larger periods of volatility, price discovery become less obvious, more aggressive and random. The 'tipping point' for a move is rarely in the range of one or two ticks for volatile market conditions as it is during a smaller trading range - there is a great deal of noise around the areas where the market is about to make a move from.

Also, you get the situation where you are waiting for that point to sell and somebody hits through several price levels, going through the price you wanted. You couldn't get in earlier, because the trade could go either way if you entered too soon. You can either wait and hope it retraces to get your initial entry price but, doing this, you risk losing the trade if it doesn't retrace; or you can get in at a slightly worse price keeping your stop tight, but there is a good chance of a retracement stopping you out. (This situation happened a great deal while I was trading the Eurostoxx on Wednesday). So, you get two choices, you either stop out more until you get the move right or, you increase the stop size. The effect of both of these will be similar - you will lose more trades but less ticks per trade on the one and lose less trades on the other with more ticks per trade being lost.

I would be surprised in these market conditions if traders, who were keeping their trade stops the same as they were a few months back, are still be returning the same ratios of winners to losers - it would make more sense that they were having to have a few more 'bites of the cherry' to get the move they were seeking exactly right whilst using tight stops.

Yes, I agree the price must be focused on, but when you start looking at wider ranges and larger periods of volatility, price discovery become less obvious, more aggressive and random. The 'tipping point' for a move is rarely in the range of one or two ticks for volatile market conditions as it is during a smaller trading range - there is a great deal of noise around the areas where the market is about to make a move from.

Also, you get the situation where you are waiting for that point to sell and somebody hits through several price levels, going through the price you wanted. You couldn't get in earlier, because the trade could go either way if you entered too soon. You can either wait and hope it retraces to get your initial entry price but, doing this, you risk losing the trade if it doesn't retrace; or you can get in at a slightly worse price keeping your stop tight, but there is a good chance of a retracement stopping you out. (This situation happened a great deal while I was trading the Eurostoxx on Wednesday). So, you get two choices, you either stop out more until you get the move right or, you increase the stop size. The effect of both of these will be similar - you will lose more trades but less ticks per trade on the one and lose less trades on the other with more ticks per trade being lost.

I would be surprised in these market conditions if traders, who were keeping their trade stops the same as they were a few months back, are still be returning the same ratios of winners to losers - it would make more sense that they were having to have a few more 'bites of the cherry' to get the move they were seeking exactly right whilst using tight stops.

Jay, i suppose we all deal with the markets in our own little way. Good trading mate.

Have to disagree on each of your arguments. I'm not trying to pick a fight, but I'm under the impression that a lot of your comments are based on personal experiences. Which I'm sure are valid in your opinion, but there are no reason to make general assumptions about how price-discovery takes place.

Quote:

Originally Posted by Jaydee

Yes, I agree the price must be focused on, but when you start looking at wider ranges and larger periods of volatility, price discovery become less obvious, more aggressive and random. The 'tipping point' for a move is rarely in the range of one or two ticks for volatile market conditions as it is during a smaller trading range - there is a great deal of noise around the areas where the market is about to make a move from.

There is absolutely no reason to believe that more volatility implies more randomness. As for 'less obvious', that depends on what one is looking for. Price action has been very straightforward for the last month. As for "a great deal of noise", support, resistance, demand, supply, cause, effect,... nothing has changed and I don't see any reason to believe there is such a thing as noise. On any timeframe.

Quote:

Originally Posted by Jaydee

Also, you get the situation where you are waiting for that point to sell and somebody hits through several price levels, going through the price you wanted. You couldn't get in earlier, because the trade could go either way if you entered too soon. You can either wait and hope it retraces to get your initial entry price but, doing this, you risk losing the trade if it doesn't retrace; or you can get in at a slightly worse price keeping your stop tight, but there is a good chance of a retracement stopping you out.

I think you fail to see the point... there is no such thing as 'entering too soon'. If you enter based on a setup, a signal, a pattern, etc. and the trade doesn't go your way, no one is saying you should stay in and let your stop be taken out. Getting out breakeven and re-entering when the odds are more in your favour is a perfectly fine option. On the other hand, if you enter before any such setup/signal/... shows up, you've got no one else to blame but yourself.

Quote:

Originally Posted by Jaydee

So, you get two choices, you either stop out more until you get the move right or, you increase the stop size. The effect of both of these will be similar - you will lose more trades but less ticks per trade on the one and lose less trades on the other with more ticks per trade being lost.

No, closing a trade out prematurely (preferably at breakeven) because the market is not doing what you expect it to do, is not losing a trade, it is taking control of the few variables over which you have control and is protecting your account. Managing risk should always come first. Once you have the trade right, it won't matter if you re-entered because you won't need to "make up for the money lost" in the first one. Increasing the stop size is by all means unnecessary. I might illustrate with a chart later on.

Quote:

Originally Posted by Jaydee

An example I keep trying to give is, what if you weren't an intraday trader, what if you were trading over a period of weeks rather than minutes? Could you still get the same level of precision? I don't think so. Why is that? The obvious answer is because the market moves in a much wider range in the period of a day or week than it does in a minute or 60 minutes - i.e. it is more volatile in the longer time frame. Therefore, to say that a trader shouldn't use volatility is pure folly because it depends on the time frame and the way they trade.

Whether you are a swing trader or not, is irrelevant. Suppose the market moves on average 100 points in 15 minutes and you are trading off the 15 min interval, are you going to place stops 100 points or more away from your entry? If you are, than I suggest you find yourself a better method, because there's absolutely no need to risk. Also, if you trade over a period of weeks, won't you be looking at what happened on the hourly or daily timeframe?

Quote:

Originally Posted by Jaydee

I would be surprised in these market conditions if traders, who were keeping their trade stops the same as they were a few months back, are still be returning the same ratios of winners to losers - it would make more sense that they were having to have a few more 'bites of the cherry' to get the move they were seeking exactly right whilst using tight stops.

A lot of traders are returning a higher win% then during the two months before September. I have no general statistics, but hearing that from guys who've been in this business for 10 years, I'm sure that means something.